Tuesday, September 30, 2008

Senate Will Vote on Bailout Plan this Wednesday

New York Times reports late this evening that the Senate is scheduled to vote Wednesday on an economic bailout package after the House defeated H.R. 3997, the "Emergency Economic Stabilization Act," 228-205 on Monday afternoon.  Senate leadership believes that they will succeed in finding legislative resolution after agreeing to include additional tax breaks and extend the limit for insured bank deposits in this version of the bill.   Congress hopes to approve legislation for the rescue package in both the Senate and House to send to the President by the end of the week.    

Speculation Surrounds Passage of Bailout Bill

National Mortgage News Online reports that U.S. Senate leadership hopes to pass an economic rescue package in Congress this week. Speculation suggests that the Senate could vote on the emergency bill as early as Wednesday, which, if passed, would “put pressure on the House” to act quickly.

Read this article published by the New York Times to receive updated information on Congressional action regarding the bailout plan.

Monday, September 29, 2008

House Rejects Bailout Plan

The House defeated H.R. 3397, the “Emergency Economic Stabilization Act (EESA)” today by a vote of 228-205 despite the Administration’s public endorsement of the bill earlier this morning. Although advocates for the bill believed that it would “squeak through with a slim majority,” the initial voting period indicated that the bill might not pass. While lawmakers are scrambling to pass a bailout plan in Congress, financial markets continue to drop with the Dow Jones industrials at a reported 550 point deficit.

Read here to view coverage of the EESA by the New York Times

View the final roll call voting record from the House.

Guest Blogger John McIlwain: Today is Just the End of the Beginning

Secretary Paulson’s three page “bailout bill” has now morphed into the 110 page “Emergency Economic Stabilization Act of 2008.” A remarkable amount of hard work and good thinking has gone into the bill and it is now before the House and, soon, the Senate, apparently under rules that prohibit amendment.

The expectation is that it will pass overwhelmingly (or not at all). At lot is being written about it and there will be much more to write about it in the coming months and years. At this point, keep in mind that this is just the beginning of what will occupy the housing community for years and years to come. We are at the beginning of an unprecedented effort which will remake the federal role in housing for years to come. It can have a remarkably positive impact on the affordability of housing in the US and help stabilize the current housing crisis. Or not.

The next steps, after the bill is enacted and signed into law by the President, likely to occur this week, are the rules and programs. There are a host of things to watch, depending on your perspective, but two are especially critical for the housing community:

Section 101(d) PROGRAM GUIDELINES.—Before the earlier of the end of the 2-business-day period beginning on the date of the first purchase of troubled assets pursuant to the authority under this section or the end of the 45-day period beginning on the date of enactment of this Act, the Secretary shall publish program guidelines, including the following:

(1) Mechanisms for purchasing troubled assets.

(2) Methods for pricing and valuing troubled assets.

(3) Procedures for selecting asset managers.

(4) Criteria for identifying troubled assets for purchase.

These program guidelines are the heart of the matter. Which assets are purchased, how they are priced, and who does the buying, will control a) how effective the program is in stabilizing the credit markets in the short term (which, after all, is supposed to be the whole point of this mammoth exercise), and b) how much the taxpayers are likely to lose – or make – in the years to come.

What assets are purchased is also central to the ability of the Treasury to stabilize the housing markets. If random tranches of mortgage-backed securities and the securities built upon them (like CMOs, CDOs, SIVs, etc.), are acquired, the Treasury may not have sufficient ownership of mortgage pools to direct the servicers to modify mortgages in default in lieu of foreclosing. Focusing on acquiring enough securities to control a pool will create far greater impact on the housing markets by giving the Secretary the freedom to modify hundreds of thousands of mortgages in default, saving these homeowners from foreclosure and their communities from serious decline.

This leads to the other key provision (and the many related to it):


(a) RESIDENTIAL MORTGAGE LOAN SERVICING STANDARDS.—To the extent that the Secretary acquires mortgages, mortgage backed securities, and other assets secured by residential real estate, including multifamily housing, the Secretary shall implement a plan that seeks to maximize assistance for homeowners and use the authority of the Secretary to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures. In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.

This is the plan that can stabilize the housing markets and actually help get the economy back on its feet in the long term. It might also recast the federal role in housing by coordinating the FHA, Ginnie Mae, Fannie Mae, Freddie Mac and the Federal Home Loan Banks to both stabilize housing markets and create a new federal housing finance system that makes ownership and rental housing affordable to working families of all incomes.

So now, as this effort begins, is the time to pay very close attention to what the Treasury does with its soon-to-be acquired extraordinary powers and funds.

John K. McIlwain is chairman of NHC's research affiliate the Center for Housing Policy, and a senior resident fellow at the Urban Land Institute where he holds the ULI/J. Ronald Terwilliger Chair for Housing. Prior to joining ULI, McIlwain served as senior managing director of the American Communities Fund for Fannie Mae, and was president and CEO of the Fannie Mae Foundation.

Wachovia Purchase Intended to Calm Investors

According to an article in the New York Times, Citigroup Inc. acquired Wachovia over the weekend for roughly $2.2 billion, consolidating “Americans’ bank deposits in the hands of just three banks: Bank of America, J.P. Morgan, and Citigroup.” While Wachovia did not fail, Citigroup Inc. purchased the financial institution on an “open-bank basis with assistance from the Federal Deposit Insurance Corporation (F.D.I.C.)” This transaction is an attempt to restore confidence in the U.S. financial market in light of the ongoing credit crisis and urgent actions of lawmakers on Capitol Hill, who just released finalized drafts of a bailout bill that will be voted on in Congress later today.

Read F.D.I.C. Chairman Sheila Blair’s press statement on the sale of Wachovia to Citigroup.

Sunday, September 28, 2008

Read the Bailout Bill: Emergency Economic Stabilization Act of 2008

Please read all the details here: Emergency Economic Stabilization Act of 2008 (EESA) - Troubled Assets Relief Program

Also see Summary of EESA and EESA Step-by-Step.

And a Reuters summary of the bill, an Associated Press article entitled "Pelosi: Rescue is not a bailout but a buy-in," and the White House Statement.

Deal Reached on Financial Bailout

According to The Washington Post and other reports today "a vote is imminent on the $700 billion bailout plan." According the Post, a vote could come as early as tomorrow in the House, with the Senate expected to follow soon after.

Saturday, September 27, 2008

Harvard Law Professor Proposes a Way to Buy Whole Loans

Harvard University Law Professor Howell Jackson says the Treasury's bailout plan should target bad loans, not burned investors.

YouTube: McCain and Obama Talk About the Bailout at First Presidential Debate

Friday, September 26, 2008

Lawmakers Confident that a Resolution is in Sight

An article published this afternoon by The Wall Street Journal captures a sense of urgency on Capitol Hill as lawmakers scramble to find a bipartisan solution to the ongoing financial meltdown. President Bush recently issued a press statement citing “disagreement” among one of the chief reasons why a final resolution has not yet been released to the public. While members of the Democratic Party attempt to work provisions they believe will protect taxpayers by imposing limits on executive pay for companies participating in the bailout plan and creating an oversight board to regulate the bailout itself, Republican lawmakers are fearful that the plan introduced by the Bush administration relies too heavily on taxpayer funding. Nevertheless, all party members involved agree that a bailout deal must be reached quickly in order to aid financial institutions, individuals and communities alike.

WaMu Becomes Latest Victim of Financial Meltdown

Eric Dash and Andrew Ross Sorkin of The New York Times report that late September 25, Washington Mutual, more commonly known as WaMu, became the most recent victim of the current financial meltdown engulfing the U.S. economic market. The article, titled “Government Seizes WaMu and Sells Some Assets,” explains that WaMu is among one of the “worst hit by the housing crisis.” Investors and government agencies alike began worrying about WaMu as early as last March. Thursday evening’s federal seizure and emergency sale of WaMu to J.P. Morgan Chase for $1.9 billion confirmed such apprehensions. According to the article, the transaction caused J.P. Morgan Chase to absorb approximately $31 billion in losses that would have otherwise fallen to the Federal Deposit Insurance Corporation (FDIC).

View the article here.

Thursday, September 25, 2008

Guest Blogger John McIlwain: This Is Not Your Father’s Bailout

There is a lot of talk this week about the RTC and even about the New Deal Reconstruction Finance Corporation Reconstruction Finance Corporation. Understandable. People are trying to say that, well, we’ve worked through lots of bad debt before and so naturally we can do it again. Just give the $700 billion to the Treasury, they’ll hire some managers and consultants, and Bob’s your uncle, as the Brits would say.

Well, maybe not. In fact, this will be a whole new animal with a whole new set of challenges. To name a few:

  • The RTC took over the assets from failed banks. This new effort will have to buy the assets. The lower the price, the safer the deal for the taxpayer, while the higher the price, the more likely the bailout will work and provide the needed credit pump priming – an interesting tension, and no one yet has said how it will be resolved.
  • By a very rough calculation, the $700 billion could acquire some 2.8 million single family mortgages.That’s a bundle.If you’ve ever worked for a mortgage servicing company, you know how much paper that is.And you know as well that every servicing company has their own software (often several different software packages as they often acquire other services) and NONE of them are compatible.Just getting the data to one place and one format will take years.
  • But most of what will be bought will not be mortgages but parts of various tranches of mortgage backed securities (MBSs), commercial mortgage backed securities (CMBSs), collateralized debt obligations (CDOs) made up of MBSs and CMBSs, and structured investment vehicles (SIVs) made up of all the above. No one knows what is in most of these pools, and heaven knows where the documents are. In time, with enough effort, most of the documents will be found, but not for some time and not all of them – witness the cases where special servicers have been trying to foreclose on a mortgage without original documents, usually unsuccessfully.
  • There will be little opportunity to work out the mortgages that make up the pools on which the securities are based, or even to modify the mortgages to help the homeowners, as many people are understandably recommending.Without owning the vast majority of all the tranches of a particular mortgage pool, the Treasury (or its agents) won’t be able to modify the contract with the special servicer in charge of the assets (the mortgages) in the pool.So the servicers will still have to follow their contracts and foreclose on defaulted loans instead of modifying them.Well, sure, the Treasury could buy up all the securities based on the pool – if it can find who owns all of them, and if it can find a price at which all the holders want to sell.But unless it owns enough securities, it won’t control what happens to the mortgages.It could try to override the pool documents and take over control, and perhaps this is one of the reasons the Administration proposed that nothing they do could be reviewed by a court or administrative agency.But this is highly problematic.
  • It is probable that every large and mid-sized accounting firm, law firm, mortgage servicing firm, and anyone else who can argue that they have expertise in the area of buying and selling mortgages and mortgage securities are getting ready to get a piece of the $2 to $3 billion a year in fees the Treasury will be paying out to make this bailout work. Hopefully, the Inspector General of the Treasury is also planning to hire a whole lot of extra auditors; this is going to be a larger contracting operation than the Iraq war (and, if the Administration gets its way, without any obligation to follow any federal contracting rules or requirements).

In short, the Congress is being asked to create a massive and totally unprecedented effort in the space of a week while no one has any idea how to make this work. Talk about jumping off a cliff!

John K. McIlwain is chairman of NHC's research affiliate the Center for Housing Policy, and a senior resident fellow at the Urban Land Institute where he holds the ULI/J. Ronald Terwilliger Chair for Housing. Prior to joining ULI, McIlwain served as senior managing director of the American Communities Fund for Fannie Mae, and was president and CEO of the Fannie Mae Foundation.

Just the Facts: Breaking Down the Recent Financial Crisis

With "bailout” as the new buzz word of the day, the crisis on Wall Street has everyone talking. A recent New York Times article by Steven D. Levitt features commentary by Douglas W. Diamond and Anil Kashyap – professors at the University of Chicago’s Graduate School of Business – that breaks down the government intervention to help Fannie, Freddie and A.I.G., as well as the fall of Lehman. The article, which provides an easy-to-follow explanation for those still trying to make sense of those two dizzying weeks, predicts that accessing credit will become more difficult and more expensive for small business and everyday individuals in the wake of these drastic changes in the financial system.

Tuesday, September 23, 2008

Fannie & Freddie to Stabilize Market Through Purchase of More Mortgage-Backed Securities

James Lockhart, director of the Federal Housing Finance Agency (FHFA), issued a statement on Friday, September 19, which supported Treasury Secretary Paulson’s timely and bipartisan plan to mitigate the effects of bad mortgages on the nation’s financial market.

Lockhart’s statement highlights the most notable portion of the Treasury’s program, which calls for Fannie Mae and Freddie Mac to provide additional funding to mortgage markets by purchasing more mortgage-backed securities. As the conservator of these two entities, the FHFA has instructed both companies to move forward with this plan immediately.

Regarding the long-term purpose of this plan, Lockhart said:

“The overall goal of the program will be to contribute greater stability and liquidity in the mortgage market, which should enhance consumers’ access to mortgage financing and ultimately result in reduced mortgage interest rates relative to the current situation.”

For more information about this statement or the Federal Housing Finance Agency, please visit the Office of Federal Housing Enterprise Oversight’s Web site.

Monday, September 22, 2008

Jeffrey Lubell: Loan Mods are in the Taxpayer's Interests

Jeffrey Lubell

One of the great puzzles – and frustrations – of the unfolding mortgage crisis has been the unwillingness of loan servicers to substantially modify mortgages to keep families in their homes, even when it would appear to be in everyone’s economic interest to do so. As Eric Hangen observed in another Open House blog posting, a non-performing loan can be modified into a performing fixed first mortgage at a lower, more affordable level, and a silent second mortgage for the balance of the principal that will be repaid when the home is sold, along with a portion of home price appreciation.

The net return on this model is likely to be much higher than would be realized through a foreclosure fire sale, but due to the fragmented and sometimes conflicting interests of servicers and investors, the unwillingness of some second mortgage lenders to permit modifications, and legal concerns about the pursuit of alternatives to the tried-and-true route of foreclosure, these and other substantial loan modifications are not being made in nearly the kind of volume needed to resolve the crisis.

But now that the Administration has proposed creating a new entity to buy troubled mortgages, there may be an opportunity to fix these problems and ensure that loan modifications occur at a much higher rate. Once the government owns the loans, it should have both the clout and the economic incentive to ensure that sensible modifications are made that both keep families in their homes and maximize returns to the taxpayers.

An article by the Center for American Progress suggests the powers that may be needed to make this happen. Others (see, for example, this piece by the Heritage Foundation) argue that the new entity’s role should be more limited.

The tie-breaker has to be the best interests of the nation, and in my view, it’s clear that loan modifications that maximize the long-term economic return to the taxpayers while keeping families in their homes and minimizing negative spillover effects on communities with large numbers of troubled loans are a win-win for everyone.

Federal Housing Finance Agency Affirms Support for Continued Multifamily Financing by Fannie and Freddie During Conservatorship

A recent statement from the Federal Housing Finance Agency (FHFA) affirms the "importance of all aspects of the Enterprises’ multifamily businesses — including the LIHTC (low-income housing tax credit) area and liquidity facilities for remarketed mortgage revenue bonds for a healthy secondary market and housing affordability. In particular, support for multifamily housing finance is central to the Enterprises’ public purpose."

"As conservator," the statement continues, "FHFA expects each Enterprise to continue underwriting and financing sound multifamily business. We also do not expect either company to liquidate its portfolio of LIHTC or mortgage-revenue bonds."

For more information about this statement or the Federal Housing Finance Agency, please visit the Office of Federal Housing Enterprise Oversight’s Web site.

Friday, September 19, 2008

Guest Blogger John McIlwain: What a Difference a Week Makes

John McIlwain

What a difference a week makes. Last week all the talk was about the Fed’s takeover of Fannie Mae and Freddie Mac; now that’s old news and the world has virtually forgotten the nationalization of the U.S. residential housing markets after 70 years of steady privatization.

The politics of U.S. housing finance are fierce and complex with trillions of dollars at stake, as well as, by the way, the stability of the U.S. housing markets and U.S. economy. Unfortunately, what the feds should do with Fannie and Freddie has been swept into a larger crisis by ongoing federal takeovers; it will be even harder now to sort out the future structure of housing finance and distinguish it from the rest of the U.S. financial crisis.

Keep a couple of things in mind. When the dust settles and the Fannie/Freddie conservatorship ends, there will be a continuing federal role in single and multifamily finance; larger, in fact, than it was before the conservatorship. Only the feds can help the housing markets recover and stay healthy and only they can effectively oversee the making and selling of mortgages and so avoid another debacle.

Keep in mind also that a federal role will be needed to enable households of all income levels attain homes, whether rental or ownership. Theoretically, the drop in housing prices has made housing more affordable, but credit is so tight that home ownership is still unattainable for many. Nor should everyone own a home. Making rental housing affordable for all income levels is something only the federal government can do.

Meanwhile, until the conservatorship ends, Congress must oversee the Federal Housing Finance Authority closely. This small agency is now both regulator and owner of a $5.3 trillion dollar business; much damage can be done, intentionally or not, especially if the goal of the conservatorship is perceived to be winding down the two companies in order to privatize them, as some would have it.

John K. McIlwain is chairman of NHC's research affiliate the Center for Housing Policy, and a senior resident fellow at the Urban Land Institute where he holds the ULI/J. Ronald Terwilliger Chair for Housing. Prior to joining ULI, McIlwain served as senior managing director of the American Communities Fund for Fannie Mae, and was president and CEO of the Fannie Mae Foundation.

Wednesday, September 10, 2008

Guest Blogger Julia Stasch: Foreclosures Highlight Need for More Balanced Housing Policy

Julia Stasch

’s single-minded pursuit of the promise of homeownership is having tragic consequences for many people in Chicago and other communities across the country.

Nearly half of all subprime loans were made in low-income communities, often to borrowers who did not understand fully the loan terms and may have little or no capacity to repay them. Despite the high rates of foreclosure so far, industry experts predict that loans originated in 2006 and 2007 will be the most foreclosure-prone in history. While some families will be able to stay in their homes or purchase others, many will join the increasing ranks of renters, putting even greater pressure on the shrinking supply of affordable homes and apartments.

We need to address the effects of the subprime mortgage “meltdown,” but we also need to acknowledge a simple truth. Virtually all of us are renters at some time in our lives—either by choice or because it is the only workable option. We need to strip the myth from homeownership, restore respect to rental housing, and seek and sustain a more balanced national housing policy.

Such a policy would make affordable homeownership possible, without exposing borrowers to devastating penalties and changes in terms. It would provide incentives for the construction of new homes and rental apartments for people of modest means. It would encourage residential development near places of employment and transportation. It would help local communities to keep homes in productive use, and neighborhoods stable, as markets change over time. And a balanced housing policy would stem the loss

Julia Stasch serves as vice president for Human and Community Development for the John D. and Catherine T. MacArthur Foundation.

**Portions of this piece appeared first in Illinois Issues magazine (September 2008).

Jeffrey Lubell: Skin in the Game

Jeffrey Lubell

Here’s the six million dollar challenge facing the housing community: how can we create a safer lending environment that does not unreasonably restrict homeownership opportunities for low- and moderate-income families?

One of the most promising ideas I’ve heard is to make sure that all parties have a financial interest – some “skin in the game”– in a successful outcome. It sounds like a simple and common-sense proposition. But by most accounts, this straightforward market discipline was sorely lacking during the boom years that led to the foreclosure crisis.

One hears this argument most frequently as justification for larger borrower down payments. But if all parties are to retain “skin in the game,” we need to consider as well the incentives applicable to mortgage lenders and brokers.

One promising approach – particularly for nonconforming loans that cannot be sold to Fannie Mae or Freddie Mac – is for lenders to use “covered bonds” to raise funds to issue mortgages. Since lenders retain the credit risk, they have a strong financial stake in a positive outcome.

Here’s another approach: What if a substantial portion of the compensation of mortgage originators were tied not to the issuance of the mortgage, but to its performance over time? Arguably, this would create a financial incentive for originators to ensure that borrowers can afford their mortgages, without handcuffing lenders and borrowers by limiting what products may be offered, and without exposing originators to liability under a yet-to-be-defined legal standard.

There are obviously many questions that would need to be resolved to implement this policy. How would successful performance be defined? How much of the total compensation would have to be deferred until loan performance could be ascertained? Who would enforce the policy?

But as we move beyond the immediate crisis, these and other approaches for ensuring that all parties keep some “skin in the game” merit serious consideration.

Jeffrey Lubell is executive director of NHC's research affiliate the Center for Housing Policy, which specializes in developing solutions through research.

Thursday, September 4, 2008

Eric Hangen: Partnership Mortgages as a Promising Foreclosure Prevention Tool

Eric Hangen

Shared equity as an approach to foreclosure prevention is an idea that lots of people are talking about.
However, most of the strategies currently being discussed require the government to take big financial risks and expose lenders to huge write-offs and losses. There is a way to employ shared equity that offers a win-win opportunity for homeowners and lenders without government intervention. It's called a Partnership Mortgage, and works in the following way:

  • Lenders would determine the maximum amount of the mortgage that can be prudently underwritten, given current loan-to-value and homeowner affordability constraints. The homeowner would make regular monthly payments on this portion of the existing mortgage balance.
  • The remaining amount of the existing mortgage balance would require no current payments of principal or interest from the homeowner. Instead, this portion would be due upon resale of the property, along with a share of appreciation in the home over its current value.

When the approach is done right, homeowners will typically be able to pay back the remaining principal balance simply from the build-up of equity as they make payments on the current-pay component of their mortgage. They’ll keep their home - and will still build real equity for the future. Meanwhile, lenders will recoup what they would have written off. Even in scenarios with slower-than-normal house price growth, they can earn a decent return on their principal –enough to motivate them to hang in there with the homeowner.

Partnership Mortgages are not going to be the solution for every delinquent mortgage. Nevertheless, for many homeowners – such as many of the 1.5 million subprime borrowers facing an interest rate reset in 2008 - they present an attractive option for staying in their homes while promising a fair return for lenders.

Eric Hangen is president of I Squared Community Development Consulting, Inc.